By Nirupa Manoharan, Special Counsel

Introduction

In September I reported on the High Court decision in Mighty River International Limited v Mineral Resources Limited [2018] HCA 38.  In that decision the High Court firmly stamped its approval of the use of “holding DOCAs” by administrators.

The apparently controversial deed of company arrangement (DOCA) in this administration continues to occupy the Court’s time. This time we return to the Supreme Court of Western Australia in Mighty River International -v- Bryan Hughes and Daniel Bredenkamp as Deed Administrators of Mesa Minerals Ltd (Subject To Deed Of Company Arrangement) [No2] [2018] WASC 368 and the administrators’ decision to recommend the DOCA proposal voted in by creditors.

Background

Mesa Minerals (Mesa) was a mining company and Mighty River a minority shareholder of Mesa.

Following dismissal of Mighty River’s arguments arising from the holding DOCA, the administrators and Mesa’s JV partner, Auvex Resources Limited (Auvex), executed a term sheet.  That term sheet broadly provided that Auvex would purchase some of Mesa’s assets in exchange for a non-refundable payment (approximately $2 million), the subordination of related party claims and the assumption by Auvex of one related party debt in full.  The term sheet was subject to Court approval.

The Administrators estimated incoming funds from the sale of Mesa’s assets in liquidation to be around $1 million. The Administrators’ report to creditors setting out the Auvex proposal therefore recommended a variation to the current DOCA to facilitate the proposal.  The creditors resolved to vary the DOCA to accommodate the proposal.

Justice Le Miere of the Supreme Court of Western Australia was then asked to consider two applications.

Having apparently bounced back from its High Court defeat the first application was brought by Mighty River seeking, among other things, an injunction that the proposed DOCA relating to Mesa be terminated and that Mesa be wound up. Mighty River contended, among other things, that the administrators had failed to properly investigate Mesa’s claims against its related entities and directors, had admitted related party debts without adequate or proper investigation and had failed to take into account the interests of members in recommending the proposal.

The second application, brought by the administrators, sought the inverse direction, being approval for the administrators’ decision to enter into the varied DOCA.

The Court’s deliberation of the applications included consideration of whether the proposal to dispose of Mesa’s assets was reasonable. In reaching its decision, the Court affirmed the well established principle that a Court will not second guess the business judgment of an administrator or creditors who approve entry into a transaction.  Rather, the Court is concerned with whether the administrator has negotiated and entered into the proposed transaction in good faith and for a proper purpose.

Justice Le Miere conclusively determined that the administrators in the present case had satisfied this test.  Specifically, in realizing the value of Mesa’s assets the administrators had appropriately advertised those assets and engaged a leading specialist in the area of mining assets to carry out a marketing campaign and provide an indicative valuation. The Court also found the administrators had in the circumstances negotiated the best deal they could with Auvex.

The key take away from this decision was the Court’s view of the reasonableness of the administrators’ considerations and actions in entering into and giving effect to the Auvex proposal.  The Court stressed that it was not “the task of the court to consider the commercial desirability of the transaction as if it and not the administrators were deciding to enter into the transaction.”

Take away points

Mighty River’s penchant for challenging the decision of Mesa’s administrators has, somewhat ironically, provided real validation for the actions and decisions of administrators dealing with complex DOCAs. This latest decision provides further comfort for administrators in confirming that a Court will not generally second guess their decision to recommend a DOCA proposal provided they have applied their business judgment and acted in good faith and for a proper purpose.